Indian Infrastructure Arbitration At A Crossroads: NHAI's Withdrawal & The Impeding Fallout

Indian Infrastructure Arbitration at a Crossroads: NHAI's Withdrawal & the Impeding Fallout

1. Introduction 

India has promised at the highest levels of government to make itself a premier place for international arbitration during the previous ten years. From various amendments to the Arbitration and Conciliation Act, 1996 to the establishment of institutional arbitration centres, India appeared to be prioritising arbitration as a method of resolving disputes.1 However, in this context, the National Highways Authority of India's ("NHAI") January 2026 circular, which limits arbitration for highway contract disputes over ₹10 crore, marks a concerning change.2

This paper delves into the recent regulatory changes that have gradually limited arbitration in public procurement, with a special emphasis on NHAI's directive. It is argued that the reasons behind these actions are based on incomplete evidence, wrongly identifies arbitration as the cause of systemic problems, and could seriously damage investor confidence, project bankability, and India's reputation as a global arbitration jurisdiction. The paper concludes by proposing institutional improvements that can effectively address valid governmental concerns without undermining the dispute resolution framework essential to India's infrastructure industry.

2. India's pullback from arbitration: nhai's circular 

1. Understanding the Timeline

The first official sign that the Indian Government's policy was changing came in June 2024, when the Ministry of Finance ("MoF") released "Guidelines" for arbitration and mediation in public procurement contracts in the country.3 The goal was not to get rid with arbitration, but to fine-tune it. It was only suggested for conflicts worth less than ₹10 crore; for disputes worth more, mediation or High-Level Committees ("HLC") were suggested. People said that arbitration was expensive and did not work, but they did not say it was wrong. Initially, Oil India and ONGC were two of the first companies to implement the strategy,4 with other state-run companies such as NTPC, NHPC, EIL etc. were still hesitant,5 showing that the policy didn't have the full support of all institutions.

In response, the Arbitration Bar of India wrote to the Union Finance Minister to say that the Guidelines went against the government's own pro-arbitration policy, would scare off investors, and would send complicated cases back to an already busy court system.6 In July 2024, these arguments were brought up in Parliament. The MoF's reaction is interesting: they said they had "unsatisfactory experience" with high-value arbitration, but they also admitted that they hadn't kept any complete records of the expenses of arbitration and litigation.7 The only piece of evidence given was a sample study of NHAI and NTPC, which supposedly showed that more than 60% of arbitration rulings were contested in court. However, there was no supporting data for the same, which undermines the validity of the overall policy reorientation.8

After that, reactions from the states came. In November 2024, Karnataka's Law Minister said that the state couldn't afford to keep the 2014 notification mandating compulsory arbitration clause for government contracts and tenders.9 The Delhi Public Works Department's April 2025 notification ("PWD Notification") took a much more definitive stance, by removing arbitration clauses from all future contracts and limiting disputes to Delhi courts via Clause 25 of the amended General Conditions of Contract.10 This was a big change from the MoF's careful approach and a reversal of a decade-long legislative trend without any evidence being made public.

2. NHAI's Circular and Its Importance for the Sector

The most important way that the policy change affects the industry is through NHAI's January 2026 circular, which put the Guidelines into action by changing the model concession agreements for BOT (Toll), HAM, and EPC highway projects. Highway contracts don't work well with the ₹10 crore limit because projects usually cost between ₹3,000 crore and ₹5,000 crore, and disputes often happen because of things like land acquisition delays, scope changes, force majeure, and late payments that go way over this limit.11 The National Highway Builders Federation (NHBF) has said that the universal threshold is not practicable for business and will send most highway disputes to civil courts, which will have serious effects on the project's liquidity and profitability.12

It's important to note that this is not the first time the government has tried to do rid of arbitration. The 2015–16 budget speech by the former Finance Minister promised the Public Contracts (Resolution of Disputes) Bill, however it was never passed.13 The Vijay Kelkar Committee suggested a separate infrastructure tribunal, and model concession agreements were changed to reflect this.14 However, there is no such tribunal. The pattern is clear: several ways to settle conflicts without going to court have failed, yet arbitration has persisted to handle technically difficult infrastructure problems.

3. Critiquing the policy shift: falacies and ill-effects

1. Breaking Down the Fallacies Underpinning the Policy

When you compare the policy change to India's long-standing, high-level commitments to arbitration, reflected across the legislature, judiciary, and executive, it makes no sense at all.15 The same is reflected through not only through various legislative amendments to the Arbitration Act for ensuring quick contract enforcement and increasing ease of doing business,16 but also via Law Commission Reports which recognise arbitration's role in attracting foreign investment.17

Hence, in this context, it is important to note that the government's policy is based on two false ideas, that arguably do not hold up under further examination.

The first is the belief that moving arbitration will lead to faster and cheaper results. The proof says the opposite. There are more than 1.1 crore civil cases pending in India,18 and construction litigation takes an average of more than seven years.19 Delhi alone has over two lakh cases, and almost 5,000 new registrations happen every day.20 Putting technically difficult, high-value infrastructure issues into this system will make delays worse, raise costs by adding interest, and make project uncertainty last longer. Furthermore, mediation is not legally binding, therefore if it fails, disagreements will almost always go to court, which means that any time savings would be lost. 

The second mistake is to think that arbitration is the cause of problems. If you read the Guidelines carefully, it is seen that this is not the case. Paragraph 4(iii) says that officer transfers that happen over and again and holes in institutional memory are two things that can cause delays. Paragraph 5(v) says that officials utilize arbitration clauses to avoid taking responsibility. These are problems with how the government works, not problems with arbitration itself. Eliminating arbitration does not eliminate these incentive structures: an official who permits a matter to remain unresolved in arbitration will exhibit the same behavior in litigation.21

The Arbitration Bar of India has also said that HLC decisions don't have any legal weight if the government does not want to pay a considerable amount, which makes the mediation-HLC system mostly useless for high-value disputes. In short, the Guidelines have confused the symptom i.e., arbitral awards against the state with the disease, ignoring the problems of bad contract management, insufficient panel counsel accountability, and a lack of a clear government litigation strategy. The NHBF has said that further uncertainty may force contractors to add a 10–15% risk premium to their future bids. This cost will ultimately be paid for by the public.22

2. The Ill-Effects of the Change

The results of the policy change are clear and significant. First and most importantly, the change makes the initiative less likely to get funding. Research shows that arbitration continues to remain as the preferred mode of dispute resolution, even for state parties, particularly in the construction sector.23 The World Bank has also made it clear that project bankability depends not only on whether the project will make money, but also on how well the current dispute resolution systems work. 

Taking away this guarantee adds perceived home-court advantage and unclear timetables to financing structures, which raises the cost of capital and makes it less likely that people from other countries will want to work on Indian highway projects. People who work in the market say that India's policy shift is being seen throughout the world as a sign that contracts are less solid, which is a serious reputational issue for India since its foreign direct investment growth is facing fundamental headwinds.

Second, the change will hurt India's Ease of Doing Business (EoDB) rankings. India is now 163rd out of 190 countries in the "Enforcing Contracts" category. Making court-based adjudication the only way to settle complicated infrastructure disputes will lower this ranking even more, which goes against the government's goal of getting India into the top 50 EoDB countries.24

Third, government notifications and circulars such as the ones discussed above may bring up issues of constitutional importance. The indiscriminate exclusion of arbitration in contracts with diverse values and risk profiles, lacking any disclosed empirical justification or logical categorization, may be subject to examination under Article 14 of the Indian Constitution for manifest arbitrariness, especially when it undermines the established contractual expectations of parties who had organized financing based on the initial dispute resolution framework. 

4. The path forward

The correct answer to the valid worries that led to this policy is not to get rid of arbitration, but to change the way it works. Several focused actions are commendable.

First, the MoF Guidelines that NHAI follows should be changed to include a carve-out for highway projects that is exclusive to that sector.25 The ₹10 crore limit is not appropriate for projects of the size and technical difficulty that are usual for building national highways. The right place to settle a disagreement should be based on the type of dispute, such as delay and disruption claims, force majeure, or land acquisition entitlements, rather than a single monetary limit. If a threshold is kept, it should be based on published, peer-reviewed statistics and in line with the values of contracts in the industry, as is done in Section 29-B of the Arbitration and Conciliation Act for fast-track hearings.

Second, NHAI and MoRTH should establish dedicated arbitration defense teams staffed by personnel who will remain in the same positions for the long term and be held accountable for performance based on case outcomes and adherence to timelines. 

Third, mediation that is required and has a time limit should be included as a step before arbitration in highway concession agreements, not as a replacement for arbitration. A mediation-arbitration ("med-arb") system, in which mediation fails within a set time frame and the case goes to institutional arbitration on an expedited track, would solve worries about cost and delay without giving up the enforceability and finality that arbitration alone offers.26

Lastly, for existing highway concession agreements, NHAI should issue clarifying guidance that allows parties to choose arbitration through a supplemental agreement. This would respect the reasonable expectations of lenders and contractors who based their deals on the original dispute resolution framework.27

A government can't say it didn't help build the ways to settle disputes. People will judge India's highway initiative not by the groups it leaves out, but by how well it can settle conflicts quickly, fairly, and predictably, which is what big infrastructure projects need.

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